Economists say China’s disappointing recovery could bring more stimulus

China’s much-vaunted economic recovery after emerging from strict coronavirus lockdown measures has yet to fully materialize, leading some economists to speculate that further fiscal stimulus or monetary policy easing could fizzle out.

China’s services and consumption data came in strong in April, in line with expectations of consumers driving tariffs as pent-up demand is unleashed – but the recovery in services demand has yet to carry over into a boost in goods demand, in part because unemployment remains high.

Profits of major Chinese industrial firms fell 20.6% year-on-year between January and April. Manufacturing activity also contracted for the first time in three months, according to the statement Caixin China General Manufacturing PMI.

Industrial production rose 5.6% year-on-year in April, marking an acceleration from the previous month but only reaching half the rate of expansion expected among economists surveyed.

The job market also remains fragile. Data from the Chinese Bureau of Statistics It shows that 6 million of the 96 million 16-24 year olds in the urban labor force are currently unemployed. Of this figure, Goldman Sachs estimates that there are now 3 million more unemployed youth in urban areas than before the Covid-19 pandemic.

In a research note on Monday, Capital Economics assessed that despite losing some momentum, China’s economic recovery was still progressing at the start of the second quarter, with room for further improvement led by the services sector.

“In fact, more timely data, including those covering the Labor Day holiday, suggest that travel and consumer spending are still strengthening this month,” said China economist Sheena Yu and head of China Economics Julianne Evans-Pritchard.

“But with a difficult external picture continuing to cloud the export outlook, struggles in the housing market continue, intense political support unlikely, and quarterly sequential growth is expected to moderate through the rest of the year.”

More targeted stimulation and facilitation

Georgios Leontaris, HSBC Global Private Banking and Wealth’s chief investment officer for Europe, the Middle East and Africa, told CNBC on Monday that the combination of weak employment and commodity demand could force the Chinese government and central bank to take action.

“The way we see things is that China is going to have to deploy more fiscal stimulus, and a little bit more targeted easing as well,” he said.

“Ultimately, unemployment rates, especially among young people, have skyrocketed, and they’re going to have to bring that down in order to meet their growth goals going forward.”

China’s ruling Communist Party has set an economic growth target of “around 5%” for 2023 – the lowest in the country in more than three decades. China’s gross domestic product grew 4.5% in the first quarter, as the economy emerged from tough Covid restrictions that have been in place for nearly three years. It is widely expected to be revised in the second quarter.

In March, the People’s Bank of China announced that it would lower the Reserve Requirement Ratio (RRR) for banks for the first time this year, in order to support the emerging economic recovery.

China’s State Council in April announced a 15-point plan to more efficiently match young job seekers with roles, but analysts pointed to more long-term structural inequalities in the country’s labor market.

Despite the weaker April data, Goldman Sachs chief China economist Hui Shan said there was little sign of imminent significant macro policy easing, while the central bank’s first-quarter monetary policy report “appeared neutral.”

Last week, Chan noted that “many recent political communications have focused on medium-term topics such as the ‘modern industrial system’, the ‘national single market’ and the new financial regulatory framework.”

“Liquidity between banks has certainly remained ample, and we think the central bank is likely to cut interest rates in June to boost confidence. But we don’t expect a rate cut or significant fiscal stimulus, unless there is a sharp drop in exports in the coming months.”

Any consensus among economists on the course of fiscal and monetary policy appears to be unraveling in light of the fragile recovery.

Morgan Stanley suggested earlier this month that “additional measured easing” from the central bank could arrive from late June to late July, citing the limited spread from the services rebound to commodities and an “incomplete” recovery in the labor market.

“At the same time, investment in infrastructure – a key support for the economy in the past nine months to ease jobs – is slowing amid mounting financing pressures, after policy loading in the first quarter,” the bank’s Asia Pacific research team said.

“With weaker-than-expected growth tracking in the second quarter and a negative productivity gap, labor market pressure may persist and lead to social stability risks, and therefore we believe further policy easing is needed to sustain the recovery.”